At what price point does a Cost segregation study become worth it?

[JonPaul Kessinger]

At what price point does a Cost segregation study become worth it? I have a property I am almost done with the remodel on and it will most likely appraise for 160k and have another that did for 140k. Would it be worth it for me to do one on both? Those properties are on the higher end of the scale for my area. Thanks!

[Greg Scott]

Really, the answer needs to be broken down into two parts.

Part 1 - Are you able to use the additional depreciation?  If you are not a Real Estate Professional, you might see little to no benefit to doing a cost segregation analysis.  Talk with your CPA.  Obviously, if it won't lower your taxes, no point in doing it.

Part 2 - What is risk / reward trade-off?  This may sound like a strange question, but the IRS recognizes a number of ways to do a cost segregation analysis.  This is from the IRS Cost Segregation Audit Technique Guide, publication 5653 https://www.irs.gov/pub/irs-pdf/p5653.pdf

Various approaches may be utilized in completing cost segregation, including:
1. Detailed Engineering Approach from Actual Cost Records
2. Detailed Engineering Cost Estimate Approach
3. Survey or Letter Approach
4. Residual Estimation Approach
5. Sampling or Modeling Approach
6. "Rule of Thumb" Approach

The most robust and most expensive is #1.  On a large apartment complex, we'll typically spend about $8,000 to get one of these done.  For a multi-million dollar asset, that is totally worth the cost, and will almost certainly pass an audit.  The problem is those studies rarely make sense on a single family property.

There are companies out there that can provide a more affordable Cost Seg for you using one of the other methods (or combinations of methods).  It may make financial sense, but there is more audit risk.

On the other hand, I have a friend that owned a dozen similar properties.  He did a full engineering study on the first three, found they were all about the same, and then used #6 for the others, figuring the earlier studies justified the ballpark number he was using.   His thinking was even if the IRS says I'm wrong, I won't be wrong by much. I'll pay the back taxes, if any, and move on.